Econophysics
From Wikipedia, the free encyclopedia
Econophysics is an interdisciplinary research field, applying theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainties or stochastic elements and nonlinear dynamics. Its application to the study of secondary financial markets has also been termed statistical finance to reference its roots in statistical physics.
Econophysics applications are those such as using percolation models to explain the fluctuations of the stock market, using models of cardiac arrest, self-organizing criticality, and earthquake prediction to understand and explain stock market crashes. A basic tool of this analysis is the mathematical theory of complexity, and closely linked, information theory, theories which were developed by Murray Gell-Mann and Claude E. Shannon, respectively. Since economic phenomena are the macrocosmic result of the interactions of many agents on a microcosmic level, physical models must reflect this. There are, however, many other fields and tools from physics that can be (and are being) used in econophysics like fluid dynamics, quantum mechanics, and the path integral formulation of statistical mechanics.
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[edit] History
Econophysics was started in the mid 1990's by several physicists working in the subfield of statistical mechanics. They decided to tackle the complex problems posed by economics, especially by financial markets. Unsatisfied with the traditional explanations of economists (many of which lacked empirical justification) they applied tools and methods from physics - first to try to match financial data sets, and then to explain more general economic phenomena.
One driving force behind econophysics arising at this time was the availability of huge amounts of financial data, starting in the 1980's. It became apparent that traditional methods of analysis were insufficient - standard economic methods dealt with homogeneous agents and equilibrium, while many of the more interesting phenomena in financial markets fundamentally depended on heterogeneous agents and far-from-equilibrium situations.
The term “econophysics” was coined by H. E. Stanley in the mid 90's, to describe the large number of papers written by physicists in the problems of (stock) markets, and first appeared in a conference on statistical physics in Calcutta in 1995 and its following publications. The inaugural meeting on Econophysics was later organised in Budapest.
Currently, the almost regular meeting series on the topic include: the Nikkei Econophysics Research workshop and symposium, APFA, ECONOPHYS-KOLKATA, WEHIA.
If "econophysics" is taken to denote the principle of applying statistical mechanics to economic analysis, as opposed to a particular literature or network, priority of innovation is probably due to Farjoun and Machover (1983). Their book Laws of Chaos: A Probabilistic Approach to Political Economy proposes dissolving (their words) the transformation problem in Marx's political economy by re-conceptualising the relevant quantities as random variables.
If, on the other side, "econophysics" is taken to denote the application of physics to economics, one can already consider the works of Léon Walras and Vilfredo Pareto as part of it. Indeed, as shown by Ingrao and Israel, general equilibrium theory in economics is just based on the physical concept of mechanical equilibrium. In finance, the Black-Scholes formula for option pricing which has parallels in heat diffusion.
[edit] Impact on mainstream economics
Papers on econophysics have been published primarily in journals devoted to physics and statistical mechanics, rather than in leading economics journals. Mainstream economists have generally been unimpressed by this work [1]. Heterodox economists including Steve Keen and Paul Ormerod have shown more interest, but have made criticisms of trends in econophysics.
[edit] See also
[edit] Further reading
- Rosario N. Mantegna, H. Eugene Stanley, An Introduction to Econophysics: Correlations and Complexity in Finance, Cambridge University Press (Cambridge, 1999)
- B K Chakrabarti, A Chakraborti, A Chatterjee, Econophysics and Sociophysics : Trends and Perspectives, Wiley-VCH, Berlin (2006)
- Joseph McCauley, Dynamics of Markets, Econophysics and Finance, Cambridge University Press (Cambridge, 2004)
- Bertrand Roehner, Patterns of Speculation - A Study in Observational Econophysics, Cambridge University Press (Cambridge, 2002)
- A Chatterjee, S Yarlagadda, B K Chakrabarti, Econophysics of Wealth Distributions, Springer-Verlag Italia (Milan, 2005)
- Hagen Kleinert, Path Integrals in Quantum Mechanics, Statistics, Polymer Physics, and Financial Markets, 3rd edition, World Scientific (Singapore, 2004)(also available online here)
- Emmanuel Farjoun and Moshe Machover, Laws of Chaos; A Probabilistic Approach to Political Economy, London: Verso, 1983. [2]
- Philip Mirowski, More Heat than Light - Economics as Social Physics, Physics as Nature's Economics, Cambridge University Press (Cambridge, UK, 1989)
- Bruna Ingrao and Giorgio Israel, The Invisible Hand - Economic Equilibrium in the History of Science, The MIT Press (Cambridge, MA, 1990).
- Didier Sornette, Why Stock Markets Crash : Critical Events in Complex Financial Systems, (Princeton University Press 2004)
- Mauro Gallegatti, Steve Keen, Thomas Lux and Paul Ormerod Worrying Trends in Econophysics, Paper prepared for the Physica A Proceedings of the World Econophysics Colloquium.
